Look Who's Stalking Wal-Mart

[guest]

Target is increasingly going downmarket. Can it ape its rival and retain its cachet?


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[Spinat]

LoL..... really smart...


At a Target store, the visual sizzle usually comes from the photos of all the fabulous-looking people wearing fabulous clothes and doing fabulous things. Of late, though, there's an entirely new vibe—supersize signs screaming dirt-cheap prices. Past the cashiers is something else unmistakably novel: a sleek Euro-style mart carrying fresh cuts of sirloin, cheery piles of fruit, and hormone-free dairy.


The lowest prices on the planet! Plus a grocery store. Wait. Doesn't that sound an awful lot like Wal-Mart (WMT)?


Target reinvented American retailing. By democratizing design, it rescued the family budgeter from the aesthetic provinces of dinette sets and acid-washed jeans. Target was one of the first to use famous fashion designers to cast a halo over its brand and draw people into its stores. Before long hipsters had dubbed the retailer "Tarzhay," and everyone from J.C. Penney (JCP) to Wal-Mart was ripping off Target's cheap-chic playbook.


Now the charge is that Target is copying its archrival, and its executives are bristling. They insist they provide a superior store experience. Nor have they any plans to abandon their 15-year-old slogan: "Expect more, pay less." "We're not trying to be anyone else," says Chief Executive Gregg W. Steinhafel. "We're working hard to convey both sides of our brand."


All the same, a kind of role reversal is under way in Retail Land. Wal-Mart has long borrowed from Target. Now Target is stalking Wal-Mart. Target's magic has always been about pushing its low-cost business model relentlessly upmarket. But to get itself through the Great Recession, it appears to be going downmarket. Some critics say the strategy smacks of desperation. Others, pointing to a rebounding stock price and better-than-expected earnings last quarter, believe the strategy may be working. The challenge for Steinhafel is to compete on price without losing the Target twist.


Steinhafel's ascension as CEO in May 2008 represented mostly a change in style rather than substance. His predecessor, Bob Ulrich, the press-allergic, cowboy-booted visionary who made Target a retailing juggernaut and cultural phenomenon, was known as an authoritarian. Meeting with him, says one executive, was "a sphincter-tightening experience." (Ulrich was unavailable for comment.) Steinhafel, by contrast, is a leader people can rally behind. During nine years as president, he became known as Target's nice dad. So while he was expected to change the tone at Target, he wasn't considered likely to deviate much from his predecessor's modus operandi. After all, it was working.


Until it wasn't. The economy imploded, Americans stopped shopping, and Steinhafel found himself confronting a different world. "This was a wake-up call," he says. "We had to do a lot of soul-searching." It didn't help that as the news flashed pictures of Lehman Brothers employees carrying boxes out of their offices in September last year, Target was rolling out pop-up stores selling 22 new things from 22 new designers. The pop-ups, which came and went in four days, were in the works long before the crash and did well. But for the first time, Target seemed out of touch. Wal-Mart, with its megajugs of cheap contact lens solution, seemed prescient by contrast.


EXTREME MESSAGE MAKEOVER


At Target's Minneapolis headquarters, Steinhafel turned his airy offices on the 26th floor into a war room. The data pouring in were shocking: Sales at stores open more than a year were falling 3%, then 5%, then 10%. As the stock slid and slid, says Jefferies (JEF) managing partner Daniel Binder, people were asking: "Is there something wrong here with Target that has changed structurally?"